Pandemic UN-Preparedness

For all of the talk about pandemic preparedness within North America’s insurance and risk management communities over the past few years, it is surprising to see recent research in the United States that indicates only 55% of U. S. companies now have a plan in place for dealing with the H1N1 virus.

Of further interest is the fact that even if part of the plan includes purchasing standard business interruption coverage, that may not account specifically for the kind of damage wrought by people sick with the flu.

As Marsh notes in its recent report, Influenza A (H1N1) — Business Interruption and Time Element Coverage Considerations, standard forms of business interruption coverage are generally written to cover business losses related to physical damage. In other words, if a plant explodes, the insurance will cover the business losses associated with reconstruction of the plant and the lost income arising from the closure of the plant.

But if the assembly line workers stay at home with the flu and the plant is forced to shut down or operate at half-speed, is that the same kind of “physical” loss? Does the workers’ lack of labour count as “physical” damage to the plant?

What about the economic losses arising from the illness of workers? Where does that fit into standard business interruption coverage?

When people talk about incorporating a pandemic plan into the risk management efforts of a company, that means mitigating the economic losses potentially arising out of workers conscientiously choosing to stay home while sick (out of respect for their colleagues) or being ordered to stay home as part of a state-ordered quarantine. As it happens, outside of Mexico, there hasn’t been much reason to order such a broad quarantine.

In Canada, as of May 25, 2009, Canada’s public health agency reported 921 confirmed cases of H1N1 flu virus. Most reported cases have been surprisingly mild. Only one person in Canada has died of H1N1-related complications, and Canada has now officially lifted any travel restrictions to Mexico, where the current strain of the virus was first discovered and has caused the confirmed deaths of 42 people.

Basically, Canada got lucky. Fortunately the country’s pandemic preparedness hasn’t been truly tested after the SARS outbreak in 2003, when 44 people died after contracting the respiratory illness.

Now is the time for Canadian businesses to ask themselves what they plan to do if the H1N1 virus mutates into a more severe strain by the end of the year, as predicted by Marsh. Alas, no concrete numbers are available to indicate Canadian businesses’ state of preparedness for a global pandemic. Anecdotally, the Toronto Insurance Conference (TIC), a national association of commercial insurers, has been working with the insurance trade association, the Insurance Bureau of Canada (IBC), to hammer out a pandemic endorsement. This would cover off the kind of nightmare scenario in which a pandemic shuts down industries at a time when commercial policies are up for renewal. The endorsement would basically cover off policy renewals until they can be appropriately dealt with later.

Back in 2007, OSFI said it would be running financial stress tests on insurers to make sure they had an appropriate level of capital to account for the more cataclysmic kind of pandemics.

In the meantime, opportunistic underwriters may want to start looking at whether language in existing policies is tailored to cover off the exact nature of the economic damage wrought by pandemics.

One Canadian insurer providing “outbreak” coverage said in 2007 that there is a difference between insuring a pandemic and a contagion outbreak. Whereas a pandemic is deemed to be an inevitable occurrence affecting an entire economy (which is difficult to insure), a contagion outbreak is a random, localized event for which it is easier to price and write specific coverage. Globalization merely increases a specific “contagion risk,” says Barrett Hubbard, who was with MINT Canadian Specialty at the time.

It seems clear that a lot more work needs to be done when it comes to exploring how to write policies for businesses that respond directly to the type of damage caused by contagious outbreaks and/ or pandemics. Hopefully that work will be completed and put into action before the next occurrence of an H1N1 type of outbreak.